Living one hour north of Toronto, the COVID-19 home-buying frenzy is readily apparent. Prices have appreciated more than 20% year over year, and “Coming Soon” signs turn into “Sold” within days. Many properties don’t even make it to an MLS listing.
A realty lawyer friend told me yesterday that she is having the busiest transaction year of her 20-year practice. I asked if she saw many all-cash deals, and she laughed, “no, all highly financed.”
As government bond yields have plunged with the economy year to date, mortgage rates (which are priced off the 30-year bond yield in the US and the 5-year in Canada) have fallen with them. Central banks have been buying up mortgages to prop up prices (further suppress rates) and keep the game going.
Meanwhile, some 11 percent of mortgage borrowers from large Canadian banks — representing around $175 billion of mortgage debt — are not making payments. Up to 20% of mortgages under deferral are considered a higher risk of default. See Don’t be alarmed, but as much as 20% of Canadian mortgages are at a ‘higher risk of defaulting’:
We are most concerned about borrowers on a deferral program who are unemployed (and were receiving the Canada Emergency Response Benefit, or CERB) and borrowers on a deferral program who are employed but are earning less than what they earned pre-COVID,” wrote RBC analyst Darko Mihelic and senior associate Sanly Li in a report earlier this week.
“We are also concerned about borrowers not on a deferral program but are facing some form of financial hardship. If 20 per cent of mortgages under deferral eventually become delinquent in Canada, this equates to a mortgage delinquency rate of 2.3 per cent which is almost 4 times higher than the peak Canadian mortgage delinquency rate over the past 30 years…”
Simultaneously, appraisers are running ragged with increased pressure to rubber-stamp prices so that ‘deals’ and refinancings can close. This is all classic debt and price bubble indicia.
Similar patterns are playing out south of the border where the U.S. Mortgage Bankers Association’s refinancing index soared in March to its highest level since 2012 and remains more than 40% above its year-ago level despite some 13 million Americans being out of work and relying on weekly jobless benefits from the government.
As Danielle DiMartino-Booth explains in Mortgage-Refinancing Boom is too automated, all this activity is further aided by automated appraisal waivers, which replace human appraisers with a computer-generated model that draws values from the latest comparables where the mortgage is being refinanced.
As in the 2005-06 US housing bubble, automated lending assessments in a highly levered and quickly rising price environment are ripe for disaster. Danielle discussed these issues in the podcast below, with many cross-over points to conditions in Canada today.
Phil welcomes Danielle DiMartino Booth to the show! Danielle breaks down the economic dangers of “Appraisal Waivers” at FHA and the GSE. Here is a direct video link.
;
